A Dynamic Stochastic General Equilibrium Analysis of a Small Open Economy with Tourism

In this session, Allan Wright presents a dynamic stochastic general equilibrium (DSGE) model developed by the Central Bank of The Bahamas to analyze the macroeconomic dynamics of a small open economy with distinct tourism and non-tourism sectors. The model is calibrated to a tourism-dependent economy, and features heterogeneous firms, a flexible exchange rate, and a Taylor rule. Steady-state analysis highlights that tourism accounts for 28% of output, with consumption at 1.215 and a real interest rate of 1.0101. Variance decomposition reveals that foreign interest rate shocks explain 65.68% of consumption and 69.36% of labor volatility, while tourism productivity shocks account for 32.08% of tourism output, 59.78% of aggregate output, and 91.09% of inflation fluctuations. Impulse response functions show that a tourism productivity shock raises consumption by 0.981% and aggregate output by 0.421%, while reducing inflation by 0.730%. In contrast, a foreign interest rate shock lowers consumption by 2.057% and increases inflation by 0.221%. The flexible exchange rate mitigates these effects, underscoring its stabilizing role. These findings highlight the importance of sector-specific policies and exchange rate management in tourism-driven economies.